Saturday, July 17, 2010

Changes Required in the Legal Framework for Hydropower Development in Nepal

Ratna Sansar Shrestha

The private power producers would like to have following changes made in the present legal framework.

4.1 Hydropower Policy

HMGN must issue executive order, to be published in Nepal Gazette, to categorise various types of hydropower projects and its policy with regard to each of them.

4.1.1 Mega Projects

4.1.1.1 A new section should be added to the Electricity Act designed to assist HMGN in building necessary infrastructure for export and to extend support to the exporters of power.

4.1.1.2 A new Section should be added to the Electricity Act “empowering HMGN to fix the value of downstream benefit that Nepal is to receive.” A section of the private developers assert that they are also entitled to share in the downstream benefit.

4.1.2 Environmental Mitigation and Local Development

Sub-section (3) needs to be added to Section 11 allowing portion of the royalty to be earmarked for local development and instructing developers to disburse such portion directly to the local bodies.

4.1.2 Promotion of Foreign Investment in Hydropower

In order to encourage foreing investors to invest in Nepal’s hydropower sector following changes are required.

4.1.2.1 Choice of Law to Govern Documents

Although the choice of law to govern documents is available for all documents when foreign entities are involved but its use in settlement of disputes is limited to arbitration purposes only, to the exclusion of judicial action. Therefore, exercise of the choice to be governed by foreign law should not preclude adjudication of a litigation arising out of an agreement by a Nepali Courtunder Nepal law. Electricity Act must have a provision for this purpose incorporated in it saying “irrespective of whether law of a foreign country is chosen for the settlement of dispute, the parties to such agreement will not be deprived from having their disputes adjudicated by the judiciary of Nepal.”

Moreover, HMGN must conclude treaties with other governments, which will allow enforcement of judicial decision of one country’s court in another country on reciprocal basis.

Provision should also be made in the Electricity Act permitting mortgaging of immovable property and pledging of shares in Nepali companies to foreign lenders by specifying that “approval of loan agreement(s) to borrow from foreign entities by HMGN shall also signify that approval to mortgage real property (immovable property) and to pledge shares in a Nepali company with foreign entities has also been granted.” This will obviate the need to apply for such permission all over again under Muluki Ain (Civil Code) and Foreign Exchange (Regulation) Act, 2019 respectively.

4.1.2.3 Registration fee

The Electricity Act needs to be amended by adding an additional Sub-Section to Section 12 exempting registration fee on registration of loan document to borrow from foreign lenders for investment in hydropower projects.

4.2 Institutional Framework for Power Projects

Following changes are imperative in the legal framework from the standpoint of a private sector investor in tapping Nepal’s hydropower potential:

4.2.1 License and Water Rights

4.2.1.1 A new Section needs to be incorporated in the Act to define RFP/RFQ process and parameters to evaluate bids under such process.

4.2.1.2 Since, at the moment, there is no guarantee as to whether a survey licensee gets generation license when these licenses are granted on the basis of competitive bidding a mechanism needs to be developed in order for the survey licensee to recover its cost of the feasibility study in case it fails to bag the generation, transmission and distribution license, eventually. For this purpose Sub-section (6) needs to be added to Section 4 of the Electricity Act to stipulate that “HMGN shall make or cause to make arrangement to reimburse the cost of survey work to the survey licensee in case a survey license holder fails to be granted a generation, transmission or distribution license, as the case may be, for no fault of his, after successful completion of the survey work.”

However, the private sector prefers to have an assertion made by the Act that the survey license holder will have first right to the development license of the same site.

4.2.2 Employment of Expatriates

In order to make provision for the issue of visa without needing work permit for top two positions, Chief Executive (whether called GM, MD, CEO or Executive Chairman) and chief of finance of both developing company with foreign investment and its foreign contractor a new clause needs to be added in the Electricity Act stating that “notwithstanding anything contained in the prevalent law, no work permit shall be necessary for foreigners to work as chief executive and finance chief of an organisation set up to develop hydropower with foreign investment or foreign construction contractor involved in construction of hydropower plant.”

4.2.3 Problems in the Implementation of Project Documents

4.2.3.1 A notification needs to be issued in Nepal Gazette stating that “in the case of a hydropower project with foreign funding that is in a position to make direct payments through authorised banks, letters of credit are not required to import various items necessary for the project.”

4.2.3.2 The Project Agreement should contain a clause allowing the designated contractors to import all the necessary construction equipment at 1% custom duty in their own name with clear understanding that they are allowed to re-export equipment that are not the integral part of the project.

4.2.3.3 Moreover, the Project Agreement should also contain a clause allowing the designated contractors to apply directly for visa and work permit for its staff in accordance with the prevalent law.

4.2.4 The Nodal Agency performing One Window (Single Window) Function

4.2.4.1 A notification in the Nepal Gazette needs to be published under Clause (e) of Section 2 of Foreign Investment and Technology Transfer Act, 2049 to empower Electricity Development Centre (the Nodal Agency) to exercise the authority vested in the “department” under the Act specifically for the purposes of hydropower projects.

4.2.4.2 The Electricity Act needs to be amended by inserting a new Section empowering HMGN to constitute a Hydropower Promotion Board to be chaired by the Minister of Water Resources with high level representatives from all relevant and related ministries and departments (the Director Generals from Departments and Joint Secretaries from the Ministries); the Nodal Agency should be designated to work as the Secretariat of such a Board with its Director General as the Member Secretary. Specific functions, duties and powers needs to be assigned to such a Board in order to ensure that work related to hydropower development more on fast track.

4.2.4.3 A clause must be added to the Project Agreement listing the permits and approvals necessary to reach Financial Closure and during the course of getting concurrence to the Project Agreement from various arms of HMGN related with such activity such permits or approvals are to stand granted by the respective agency, with the final seal of approval to these coming from the Cabinet when the agreement is approved by it.

4.2.4.4 Finally and most importantly, also during the process of getting concurrence from various Ministries of HMGN, each of these Ministries should sign an instrument to formally delegate project specific authority to this agency for routine activities like import duty facility, thus, allowing it to approach frontline agencies of HMGN directly. Copies of such authorisation must be made available to the concerned frontline agencies, the nodal agency and the developer.

4.3 Financial Issues

The private power producers hold the opinion that certain changes are needed to be made in order to promote/encourage private sector investment in the hydropower project.

4.3.1 Revenue Stream for HMGN Treasury

Private sector investors in hydropower projects would like to have following changes made in the existing legislation.

4.3.1.1 Royalty

Sub-section (3) needs to be inserted in Section 11 of the Electricity Act directing a licensee to pay a specific percentage of the total royalty to the concerned District Development Committee directly.

4.3.1.2 Import Duties

Present Section 12(7) must be replaced with the following wording:

No VAT and any other tax, including import license fee, shall levied and only 1 percent customs duty will be payable on import of following items, if such items are not produced in Nepal in right quality, by a licensee involved either in the construction of a hydropower plant or its operation:

(a)plant, machinery and equipment that form and constitute integral part of the plant,

(b)contractors’ equipment (construction equipment),

(c)spares of above without any ceiling,

(d)communication equipment, office equipment and other equipment deemed to be non-construction equipment including spares thereof, and

(e)construction materials or materials needed for repair and maintenance of the project.

4.3.1.3 Value Added Tax

4.3.1.3.1 The replacement of words Sales Tax by VAT in the Section 12(7) as described above solves the problem and in the interim HMGN must publish a notification in Nepal Gazette to the same effect.

4.3.1.3.2 A clarification needs to be added to the above Section 12(7) stating that “nobody will be deprived of the above facility merely due to the fact that a contract contains components deserving such facility along with those not entitled to a such facility.”

4.3.1.3.3 A new Sub-section must be added to Section 12 allowing hydropower developers registration with VAT Office as zero (0) VAT establishment.

4.3.1.4 Export Duty/Tax

4.3.1.4.1 The words “export duty” in Sub-section 3 of Section 22 of Electricity Act, 2049 and the words “export tax” in Rule 27 of Electricity Regulation, 2050 must be replaced by the words “export royalty.”

4.3.1.4.2 Certain potential exporters of power feel that law must fix the rate of the “export royalty”.

4.3.1.5 Income Tax Holiday

4.3.1.5.1 No changes necessary as the legislation with respect to this is clear; the problem lies with the arbitrariness on the part of the tax authorities.

4.3.1.5.2 HMGN should conclude agreement on double taxation with countries from which Nepal is inviting investors to invest in the hydropower sector.

4.3.1.6 Local Taxes

Another Sub-section needs to be added to Section 12 of the Electricity Act to preclude levy of local taxes on hydropower projects.

4.3.1.7 Change in Law

The Electricity Act needs to be amended to add an additional Sub-section to Section 12 stating that “no additional or new tax, fee, charge, etc. (whatever name is used) shall be levied by any governmental agency including local government on a hydropower developer other than those mentioned in this Act.”

Similarly, another clause needs to be added to the above Section saying “the tax rates shall stay same as at the time of issue of license for each specific individual developer throughout the tenure of the license.”

4.3.2 Non-Tax Financial Issues

From the perspective of promoting private sector invesment in Nepal for the benefit of the investors, HMGN and Nepali consumers following changes are imperative.

4.3.2.1 Tariff to be paid by NEA (Buy Back Rate) and Tariff for Consumers

A sentence in the beginning of the Section 21(2) needs to be inserted to identify three types of energy namely, peak energy, or primary (base) energy or secondary (excess) energy and state that different rates may be fixed for each of these types of energy.

4.3.2.2 Repatriation

The words “except in the case of the export oriented hydropower projects” are required to be added at the end of the Section 13 of the Electricity Act.

This is the fourth chapter of the report on the Study of Legal Framework and Institutional and Regulatory Process for the Development of Private Power Projects in Nepal , prepared in the capacity of the Legal Specialist, in June 1998. A set of four separate working papers were presented in a one-day workshop on “Legal and Institutional Framework for Hydropower Development in Nepal” based on the above study, in June 1998.

Working paper presented in a WORKSHOP ON ‘LEGAL AND INSTITUTIONAL FRAMEWORK FOR HYDRO POWER DEVELOPMENT IN NEPAL’ held on June 23rd, 1998